Grove Collaborative Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Grove sells sustainability-focused household and personal-care products through its direct-to-consumer (DTC) platform and retail partners. Unless indicated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $61.8 | $77.7 | $199.4 | $247.5 |
| Gross profit / margin | $33.2 / 54% | $38.2 / 49% | $104.8 / 53% | $119.9 / 48% |
| Operating loss | $(4.1) | $(22.6) | $(27.3) | $(112.6) |
| Net income (loss) | $(9.8) | $7.7 | $(33.7) | $(75.0) |
| Adjusted EBITDA (non-GAAP) | $0.2 | $(9.6) | $(9.3) | $(70.3) |
| Net cash used in operating activities | Not provided quarterly | $(9.1) | $(89.5) |
Q3 revenue declined 21% year over year; nine-month revenue declined 19%. Grove attributed the decrease mainly to fewer DTC orders and active customers following reduced advertising. Q3 DTC orders were 917,000 versus 1.242 million; active customers were 1.019 million versus 1.460 million. DTC revenue per order rose to $65 from $61, supported by a supply-chain fee, price increases and a greater share of orders from existing customers. Grove Brands represented 45% of Q3 revenue, down from 47%.
Gross margin improved, partly due to lower inventory-reserve charges and fewer lower-margin first orders; the nine-month improvement also reflected the supply-chain fee. Lower revenue was accompanied by substantial expense reductions: nine-month advertising fell 71%, product development 34%, and selling, general and administrative expense 34%. Q3 net income in the prior-year period included large noncash gains from fair-value changes in earn-out and warrant liabilities, making the comparison less indicative of underlying operating performance.
Liquidity, debt and capital
- At September 30, cash and cash equivalents were $86.1; restricted cash was $8.7; working capital was $92.5. Nine-month operating cash use was $9.1, and total cash, cash equivalents and restricted cash decreased $1.2.
- Debt had a $70.8 net carrying value on the balance sheet. Management separately reported $79.5 of total outstanding indebtedness; this reflects principal amounts and differs from the balance-sheet carrying value. Structural facility principal was $72.0 and Siena Revolver principal was $7.5.
- The Structural facility has a 15% minimum annual rate, with a reported contractual rate of 16% at quarter-end and an effective accounting rate of 21.11%. Principal repayments begin July 2025; maturity is December 2026. It is secured by company assets and requires at least $57.0 of unrestricted cash, along with revenue covenants. Grove reported compliance with its debt covenants.
- The Siena Revolver had $11.5 of additional borrowing capacity at quarter-end, subject to borrowing-base and other conditions. Grove had drawn $7.5 of its initial $35.0 commitment.
- Grove received $10.0 gross proceeds from a Series A redeemable convertible preferred-stock financing in August. The preferred stock carries cumulative 6% dividends and may be redeemed by holders after seven years; the financing also included warrants.
- Grove stated that available cash and resources were expected to fund operations for at least one year from the filing date, but it expects continuing losses and negative operating cash flows and anticipates needing additional capital over the longer term. The SEPA permits stock sales subject to conditions and a share cap; only $2.4 of gross proceeds had been raised under it by quarter-end.
Outlook, risks and unusual items
- Management expects advertising to remain at reduced levels through 2023 and anticipates that the resulting decline in new-customer acquisition and orders will continue. It seeks to balance customer growth with cash management and profitability; the filing provides no formal financial guidance.
- Management warned that revenue must recover sufficiently to exceed operating expenses for profitability, and that recent progress toward profitability may not be sustainable. Additional financing may be unavailable on acceptable terms; equity financing could dilute shareholders.
- The California district attorneys’ task force is investigating compliance with automatic-renewal, unfair-competition and false-advertising laws. Grove said a loss is probable but that it cannot reasonably estimate the amount or range.
- The FTC is investigating billing and automatic-renewal practices and related matters. No proceeding had commenced, and Grove could not estimate the probability or amount of loss.
- Public warrants were delisted from the NYSE in June 2023 due to low trading prices; their valuation now relies on a Level 3 model with significant unobservable inputs. Fair-value changes in derivatives and other liabilities can cause earnings volatility.
- Grove reported an accumulated deficit of $611.6 and concentrated supplier exposure: its five largest suppliers represented about 40% of inventory purchases in 2023. It also had $13.7 of merchandise purchase commitments and $3.4 of letters of credit.
Most important facts for investors to verify
- Whether customer and order declines stabilize while Grove maintains reduced advertising, and whether retail expansion offsets DTC weakness.
- Cash burn, unrestricted cash relative to the Structural facility’s $57.0 minimum, covenant compliance and actual availability under the Siena Revolver.
- Progress toward sustained positive operating cash flow, including whether adjusted EBITDA improvement translates into lower cash use.
- Potential financial or operational effects of the California and FTC investigations, for which loss estimates were not available.
- Potential dilution from preferred-stock conversion and warrants, equity-plan awards and any future SEPA or other financing; the filing lists 19.8 million potentially dilutive shares excluded from diluted loss-per-share calculations as anti-dilutive.
- The difference between the $70.8 balance-sheet debt carrying value and management’s $79.5 outstanding-indebtedness figure, and the contractual costs and terms of the debt facilities.